RCM Managed Asset Portfolio - Is a Recession Coming?

RCM Managed Asset Portfolio 

By Christopher Chiu, CFA

May 2025

Is a Recession Coming?

Many of you are wondering whether we are headed toward an economic recession. This is an update to the article I wrote in January in which I covered this very same topic. But since conditions have changed, I have some new things to report. 

Clear Signs

There are a few signs that indicate that a recession is getting closer. Heavy truck sales, which gauge near-term investment, are no longer robust, far from it. As you can see, heavy truck sales start heading down before each recession (as shown by the shaded grey areas). This is one of my favorite indicators because it gives us a few months lead time before the other signs confirm a recession. In other words, it gives investors time to act before the storm really comes.

As seen above, heavy trucks sales were holding steady heading into the end of 2024. It seems now, however, that this trend is breaking downward with a huge move down in March of 2025. If sales head still lower, it portends a slowdown in near-term investment. Historically, 350,000 heavy vehicles sold per month has been a clear sign that we will soon be in a recession. We were currently at approximately 400,000 heavy vehicles sold in the month of March.

While another indicator--the industrial production index—is not yet indicating a recession, I anticipate it will soon with the cost of supply becoming uncertain in the short-term because of tariffs.

When exactly this drawdown in industrial production will occur is not clear. Nor is it clear how severe it will be. But the severity of the drawdown will be some indication of how severe an economic slowdown will be.

Many indicators which bottomed in 2022 had been on the rise since. For example, consumer sentiment, which had already dropped as a result of record inflation in 2021-22, had been rising again through 2023 and 2024 as the inflation receded.

However, this buildup in consumer sentiment has been too short-lived. Without having first built consumer confidence back to levels which would indicate a robust consumer environment, consumer sentiment took another dip in the month of March 2025 from already low levels.

Finally, there is the picture of the credit that has been emerging. Credit spreads, or how much extra yield lenders need to be compensated in order to lend to riskier projects, have been widening lately from low levels at the start of the year when risky credit was considered very good.

Credit-wise, we are at the same point as we were in February 2020 or May 2008, which presaged major negative events for the U.S. and world economies. However, widened credit spreads are not certain predictors of calamity. These credit spreads were also as wide during July 2011 and July 2015, which presaged equity volatility but were not calamitous for long-term economic growth. So it remains to be seen how much economic weakness is being anticipated by these wider credit spreads.

Overall, there are definitely some clear signs that the economy is on the tip of weakening. The only question is how far the recent equity market drawdowns and bond market volatility have already priced in this future weakness. What is clear though from remembering previous economic cycles is that an already weak economy leaves it vulnerable to external shocks. And how large these may be, if they are to occur at all, has yet to be determined.